Kansas agency head: Other states are watching Waddell

Missouri apparently isn't the only state keeping tabs on Waddell & Reed Financial Inc.'s controversial switch in variable annuity providers three years ago.

"It's been something that's been known for some time," Kansas Securities Commissioner Chris Biggs said Wednesday. "I'd be surprised if most states aren't monitoring it or reviewing it."

On March 25, the Missouri Securities Division issued a two-week suspension of Waddell & Reed's broker-dealer registration in the state. Securities Commissioner David Cosgrove said the action came in response to Waddell & Reed's switch in variable annuity contracts it sold to investors from United Investors Life Insurance Co. to Nationwide Insurance Co. between January 2001 and August 2002.

The transactions drew the attention of the National Association of Securities Dealers, which filed a January 2004 complaint that alleged the switch cost Waddell & Reed customers nearly $10 million in surrender fees while netting the company $37 million in commissions.

A judge in St. Louis County Circuit Court overturned the Missouri Securities Division's suspension with a temporary injunction, ruling that the action wasn't in the best interest of Waddell & Reed's Missouri customers.

State regulators across the country will closely watch for the outcome of Waddell & Reed's May hearing before the NASD, Biggs said. Though it's not unusual for state securities commissioners to communicate with each other, he said he was surprised by Cosgrove's action against Waddell & Reed.

"I can't speak to what history Missouri has or what's going on," Biggs said.

Waddell & Reed spokesman Roger Hoadley said in a Tuesday e-mail to The Business Journal that no other states have taken any formal actions against the company related to the variable annuity transactions.

"Given that the transactions being reviewed took place more than three years ago, and that the Missouri order includes no reference to violations of specific Missouri securities laws, this is a highly unusual situation," he wrote.

Variable annuities are contracts between investors and insurance companies in which the insurer agrees to make periodic payments to the investor. They can be controversial products -- commissions and early withdrawal penalties can be high.

Biggs said about a third of the complaints his office receives come from investors frustrated with variable annuities.

Many states, like Kansas, do not define variable annuities as securities, so some questions remain about which agency should regulate them, Biggs said.

Waddell & Reed ranks No. 17 on The Business Journal's list of area public companies.